What Japan's 'mother machines' tell us about the world's manufacturing pulse

For clues of how well the world’s manufacturers are doing, take a trip to Japan. The country is one of the biggest producers of machine tools in the world. Referred to as ‘mother machines’, machine tools are used to produce the parts needed for all manner of manufacturing equipment, including industrial robots. Only Germany gives Japan a run for its money in the business of high-end machine tool production.

The number of orders for these machine tools is the subject of this week’s Chart Room. The blue bars show how absolute order numbers have been on the slide for the better part of the past two years. That reflects the slowdown in factory activity from Asia to Europe, against a generally gloomy economic backdrop.

But the orange line in the chart, which shows year-on-year changes and better reflects momentum in orders, indicates that demand probably found a bottom around last May, when orders declined more than 20 per cent from the previous year. The December and January readings showed orders are still in decline, but percentage losses have narrowed to the low teens. A return to growth could soon be on the horizon. 

What’s changed, and how is this different from previous cycles? China. On paper, Japan ships only 20 per cent of its machine tools to its neighbour. In reality, however, a good chunk that are categorised as ‘sold within Japan’ are eventually shipped to China. Already, China’s export-focused unofficial purchasing managers’ index (PMI) accelerated for the third straight month in January. Official PMI - with a broader sample size - remains in contraction, but a sustained recovery in machine tool exports in the coming months would confirm positive momentum in Chinese factory activity. 

However, as China tries to pivot from property-driven growth, this recovery may unfold more slowly than investors are used to. While demand in sectors such as electronics is gradually coming back, we expect future purchases to rely less on China overall. As companies continue to build capacity outside of China to diversify their supply chains, machine tool orders may find more support in markets such as the US, Europe and Southeast Asia. After a long winter, a rebound is within sight for Japan’s machine tool orders - but it is likely to chart a different path from previous cycles.